Bounce in NZ commercial property market expected

A bounce in New Zealand’s commercial property market looks likely in 2018 after a significant slowdown around last year’s election, with the industrial, office and tourism sectors all continuing to show promising signs of growth.

However, uncertainty around the implementation of foreign ownership restrictions may put off some overseas investors, resulting in a shallower pool of buyers at the top end of the market.

We expect on- and off-market sales volumes will trend upwards as vendors look to offload the significant amount of stock that remained unsold during the latter months of 2017.

Corporate owner-occupiers will continue to divest via sale and leaseback to free up capital to invest in their businesses, while significant institutional and private investors will offload non-strategic assets to improve the quality of their portfolios.

The room for further yield compression is small, but still possible in prime assets. However, the major contributor to capital growth will continue to be rental growth, driven by record low vacancies and new supply not meeting demand.

Attractive fundamentals

New Zealand will continue to be attractive to offshore investors, thanks to ongoing net immigration and GDP growth, coupled with little likelihood of material interest rate rises.

However, the government’s proposed foreign ownership restrictions are likely to create uncertainty until there is greater clarity about what types of assets will be caught in the Overseas Investment Office’s net.

We expect this will have the biggest impact at the top end of the market, where the pool of local buyers is shallow.

Of the 12 Auckland commercial property transactions worth $50 million or more last year, only one was sold to a local buyer.

The property at 2-4 Fred Thomas Drive, Takapuna, was sold by Colliers International to syndicator Maat Group for $60.85 million, representing a yield of 7 per cent.

New Zealand’s ongoing tourism boom will continue to buoy the commercial property market, particularly the hotel and retail sectors.

Visitor arrivals are likely to top 4 million this year, after a record 3.7 million arrivals in the year to October 2017.

Undersupply continues to be the hotel sector’s biggest constraint. In response, investors have been buying up residential units and renting them out through Airbnb.

We expect a number of councils will follow Queenstown’s lead in introducing bylaws to limit Airbnb’s negative impacts – notably residential rent increases driven in part by Airbnb’s pressure on rental housing supply and affordability.

Industrial squeeze

In the industrial sector, the tightening market will continue to be the single biggest issue.

Rental and land value appreciation will continue, while yields will hold firm as undersupply worsens.

Demand for industrial space will increasingly be driven by the growth of online retail.

In the office sector, yields will remain low as new supply fails to meet pent-up demand.

Rents will continue to rise from an already strong base – we are aware of rents in excess of $500 per square metre being regularly achieved in 151 Queen Street in Auckland’s CBD, for example.

In the retail sector, online competition will continue to be a challenge, but this will be offset somewhat by the growth of food and beverage retail, driven partly by sustained tourism growth.

Shopping centres will continue to capitalise on this trend by curating new dining, entertainment and leisure precincts that emphasise indoor-outdoor flow, such as Sylvia Park’s newly opened The Grove.

In Auckland, the year will be bookended by the closure of the Two Double Seven shopping centre in Newmarket, which Scentre Group is refurbishing and expanding over two years, and the opening of the first retail stage of Commercial Bay in mid-2018, with the balance of the centre opening in the first quarter of 2019.

In the residential apartment sector, supply pressures will continue despite the completion of many of the apartment projects launched two to three years ago, such as Skhy in Grafton and Botanica in Mount Eden.

Investors who bought apartments off the plans could benefit from substantial capital gains.

We are aware of apartments in Botanica selling for between $200,000 to $350,000 more than their purchase price – an increase of 25 to 30 per cent over a two-and-a-half-year period.

Golden triangle

Auckland’s undersupply across the office, industrial and residential sectors will continue to have positive flow-on effects for the other centres in the ‘Golden Triangle’, which is the fastest-growing area in New Zealand.

Hamilton will continue to attract large industrial users, as evidenced by Visy’s $100 million design build deal to establish a new plant at Hamilton Airport.

This growth is being enabled by substantial infrastructure investment including Ports of Auckland’s Waikato Freight Hub, Tainui Group Holdings’ Ruakura Inland Port, and continuing improvements to the Waikato Expressway.

The Tauranga market will be fuelled by growth in both the residential and industrial sectors.

A number of high-density residential projects are in the pipeline, while the Tauriko Business Estate continues to attract substantial industrial users like freight and logistics company NZL Group, which plans to move from Mount Maunganui to a $20 million purpose-built facility.